UK: IFAs Deserve Certainty Of A 15 Year Long-Stop Time Limit For Complaints, Says Browne Jacobson

Last Updated: 22 October 2008

Continued resistance of 15 year time limit on professional negligence claims unfair for IFAs says law firm

Law firm Browne Jacobson is supporting calls from IFAs for the adoption of a 15 year time limit on complaints to the Financial Ombudsman Service ("FOS") relating to poor investment advice.

Initial proposals put forward by the Financial Services Authority ("FSA"), in its Retail Distribution Review Discussion Paper in June 2007, might not now be adopted due to pressure from consumer groups that have lobbied for an open ended period within which complaints could be made to the FOS, forcing IFAs to stand (or fall) by advice given twenty or even thirty years ago. The FSA is due to report back with final proposals in November, however Browne Jacobson associate Jonathan Newbold is worried that the FSA is not convinced by the arguments so far put forward by the financial services industry.

One of the primary purposes of a 15 year long-stop date is to protect would-be defendants against stale claims. Without a long-stop date, firms would be exposed to complaints about advice given more than 15 years ago. If not adopted, the long-stop proposals could leave IFAs and their professional indemnity insurers exposed to a long-tail of unexpected claims.

Jonathan Newbold said: "It is almost impossible to manage historical liabilities because it is never going to be entirely safe to assume that no claims will arise from advice provided more than a decade ago. 

"If the FSA does not adopt a 15 year long-stop period for complaints to be made to FOS, the real unfairness concerns the risk of retrospective judgment being made on financial advice that was given years ago, in circumstances where standards have certainly increased steadily over the past decade or more. Clearly, the advisory process in the seventies, eighties and early-mid nineties was a lot less sophisticated than it is today, and there is a risk that yesterday's advice will be assessed against the backdrop of today's much more exacting and regulated standards.

"The result is that Ombudsman determinations risk being tainted by hindsight, which would be an unfair outcome for firms.  One only has to look at endowment complaints to see the harsh results that can be produced by the absence of any long-stop time limit and the possible influence hindsight could have on determinations."

"In an attempt to alleviate this risk and provide greater certainty about the standards against which advice will be judged, the FSA will also feedback in November on whether it is minded to adopt proposals for the annual collation of contemporary market practice for advising in different scenarios in relation to different types of product. The FSA is concerned about the cost of preparing a record of contemporary market practice, but the benefit of greater certainty and a reduction of the risk of hindsight is likely to outweigh the costs of implementing the proposal.

Browne Jacobson cites endowment complaints as a useful example to illustrate how little responsibility the FSA and FOS place upon consumers for the financial decisions they make. Despite the fact that firms might have provided investors with detailed illustrations on investment performance and annual statements on actual growth, complaints brought on the grounds that the plan holder would not have gone ahead with the endowment had they known there was an investment risk are regularly upheld. 

While the FOS is intended to be completely independent and impartial - and not a consumer champion - by effectively relieving consumers of any responsibility for their decision and assuming that they had no understanding of the risk inherent with endowment policies, unfairness to firms and bias in favour of consumers is the inevitable outcome. The question of determining the level of responsibility consumers should recognise they have in making investment decisions is also being considered by the FSA and feedback will be given when it reports back on the Retail Distribution Review consultation in November.

If introduced, Browne Jacobson understands that the 15 year long-stop would exclude approximately 2,000 complaints a year, providing assurance for IFAs who would otherwise be facing an incalculable number of cases, thus requiring significant amounts of professional indemnity cover.

Feedback from trade bodies and regulated firms supported the introduction of the long-stop, but, unsurprisingly, consumer groups strongly opposed the move. In the FSA's Retail Distribution Review - Interim Report published in April 2008, the FSA stated that before a 15 year long- stop time limit could be introduced, it would need to identify "wider benefits to consumers" such as greater consumer access to FOS, which would "need to exceed the consumer detriment from time-barred complaints".  In the Interim Report, the FSA stated that so far, it has not been able to "find the case for this". However, the FSA will re-consider the issue of "consumer responsibility" when it reports in November on all the issues.

Newbold cites a recent case (R on the application of Williams –v- Financial Ombudsman Service) where judgment was made against the IFA in circumstances were advice given years ago in relation to financial products deemed at the time to be low to medium risk, could legitimately be viewed as high risk by FOS. He said: "Although not strictly linked to the Retail Distribution Review, this case illustrates that even where the IFA could point to contemporaneous market commentary supporting its classification of a product as low-medium risk, the Courts will not interfere with FOS determinations which uphold complaints by reference to its own knowledge and experience. This causes an inherent risk that FOS will consider complaints through a lens of 20:20 hindsight"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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